"Here's why an oral contract isn't worth the paper it's written on."

By R. Bruce Wright, CPCU

Everyone has heard the saying "An oral contract isn't worth the paper it's written on." Here's an example of why that old adage should be attended to.

When I visit utilities across the country I frequently find myself initiating a discussion about the use of subcontractors and the relationship between the system and those specialist companies that it hires. Subcontractors are often used by our clients to do work for their systems, some use them regularly, while others do so less frequently. There are a variety of reasons why systems might elect to subcontract. Examples include the occasional need for specialty services for which it doesn’t make sense to hire a full-time employee, the cost effectiveness of hiring out recurring work such as ROW clearing rather than buying specialty equipment and hiring operators, or special projects that require labor intensive, but short-term efforts. While a few systems we visit prefer to avoid or at least minimize the use of non-employee workers, any of these examples may provide an economically defensible reason to hire a subcontractor, and many systems do so.

Over the years we have explored the use written contracts with insurance requirements, the importance of Certificates of Insurance (usually referred to with the shorthand “C.O.I.s”) and the best practice approach of requiring subcontractors to include you as an “Additional Insured” on their own insurance policies. (For a look at more articles on these subjects navigate to our April-May-June, 2001 issue fo an article on Certificates of Insurance, or go to our Oct-Nov-Dec, 2005 article on the use of the Additional Named Insured endorsement using the Archive button above.)

You should of course require that all work done for you by outside companies be conducted under the terms of a written contract, that valid COIs be provided by the contactor in amounts sufficient to protect your company, and that the contractor’s insurance carrier(s) add your company as an Additional Insured under the contractor’s policies. But, while these are all important, there is even more to protecting yourself that needs to be considered, a fact that has recently been driven home to us as a result of a dispute affecting a pending claim. Because that case is still open, this article will focus on the issues it raises rather than discuss the actual case details. I am sure the issue is one that you will quickly grasp and, I hope, incorporate into your own management of subcontractor relationships.

The case involved a subcontractor who was doing ROW maintenance for the insured utility. Everyone agrees that the sub was working for the insured doing ROW work. There is a written contract between the utility and the contractor, there is no question that the work contracted for was not done on the particular line where the loss occurred, but after that, the agreements fall apart. The key dispute in the case is whether or not this contract applies to the work in question, or more correctly, the lack of work, since the ROW was cleared on either side, but not on the line where the loss occurred. There are lots of minor disputes about access to the line, who was to verify areas to be worked and other similar issues, but the key sticking point is that it is clear that the written contract has been modified, perhaps even often modified, orally! The actual pay schedules in the contract were not those in use at the time of the loss, and both sides agree that there had been several agreements to change who was responsible for listing the areas cut, to be cut, and to be listed for follow-up later. In the end, it seems likely that the “contract” will not be seen as binding due to the casual way in which both parties suggested and agreed to oral modifications to it.

So, the lesson to be learned is clear. Just having a written contract at the start is not enough. In order to preserve your rights under a contract it is critical to ensure that any changes to the agreement be made in writing, acknowledged by both parties. As soon as you waive a requirement of the contract, including orally, you have begun your slide down the slippery slope that may end with the voiding of the entire contract. If the contract gives you the right to inspect the work, you should actually do so. If it says you will require subcontractors to meet your safety rules, you should do so. If it says that any changes to the contract must be in writing, you should do so. Failing to enforce your rights may leave you with no rights left to enforce!